FHSA, HBP or TFSA: Which to Use for a First Home?

FHSA: an account designed for a first home

The FHSA combines two tax advantages. Contributions are generally deductible, as in an RRSP, and qualifying withdrawals to buy a first home are not taxed, as in a TFSA. Contribution room is personal and comes with an annual limit, a lifetime limit and carry-forward rules, which accumulate from the time the account is opened. An excess contribution can trigger a penalty. Confirm eligibility conditions and exact amounts with the CRA. Our dedicated FHSA article details contributions. Because room accumulates from the time the account is opened, the account's value depends partly on how early it is set up and how steadily it is used. Reading the CRA's current rules before each contribution is a simple way to avoid an excess.

HBP: borrowing temporarily from your RRSP

The Home Buyers' Plan lets you withdraw from your RRSP, without immediate tax, to buy or build a qualifying home. According to the CRA, you need a written agreement to buy or build before the withdrawal and must be a first-time buyer. The amounts must then be repaid to the RRSP over a maximum of 15 years, starting in the second calendar year after the withdrawal. An amount not repaid in a year is added to that year's income. Confirm the withdrawal limit on the CRA's current page. The HBP suits people who already have a well-funded RRSP, but it imposes a repayment schedule. Since the amounts must go back into the RRSP on that schedule, the plan only works if the household can fit those repayments into its budget alongside the new mortgage payment. Treat the repayment as a fixed monthly commitment from the start, not as something to figure out later.

TFSA: flexibility first

In a TFSA, contributions are not deductible, but growth and withdrawals are not taxed, and the account is not reserved for a home purchase. Contribution room and the rules for re-contributing withdrawals are specific to the TFSA. Check your notice of assessment or My Account. This flexibility is useful if the purchase date is uncertain or the same savings may serve other goals. The trade-off is that a contribution earns no deduction. The TFSA can also serve as a second pocket when the purchase timeline slips, because the money is not tied to the home project. Do not confuse it with the emergency buffer unless you decide that deliberately.

Compare against your situation

Ask yourself a few questions. What is your tax rate? A deduction is worth more at higher income. Do you already have an RRSP, which makes the HBP an option? Is the purchase planned for the short term, which calls for cautious investments in any account? Do you have unused contribution room in each? One person can combine the accounts, but each has its own rules and deadlines. An accountant or financial planner can address your specific situation. If the answers point in different directions, write the trade-offs down and take them to a professional, rather than choosing on a single factor such as the size of the deduction.

Plan for the rest of the purchase

Whichever account you use, the down payment is only part of the budget. According to the FCAC, the minimum down payment is 5% for a price of $500,000 or less, with mortgage loan insurance usually required below 20%. Also plan for the notary, the inspection, transfer duties and an emergency buffer. QuebecTaux calculators, for information only and neither an approval nor a rate offer, help test these scenarios. Keep statements that show where the funds came from for the lender. Revisit the plan as the purchase gets closer. A change in income, a higher or lower target price or a delayed closing date can shift which account to draw on first.

Checklist

• ✓Check My Account to learn contribution room
• ✓Confirm FHSA limits on the CRA site
• ✓Confirm the HBP withdrawal limit on the CRA site
• ✓Verify first-time buyer eligibility
• ✓Compare the value of a deduction at your tax rate
• ✓Plan the repayment schedule of an HBP withdrawal
• ✓Keep the TFSA for costs and the emergency buffer
• ✓Avoid excess contributions in each account
• ✓Keep statements documenting where the funds came from